Strong Canadian data gives Loonie wings
FOMC meeting will disappoint
BoJ may fill the excitement void

The US dollar is ending the week in the red against all the majors except for the Swiss franc and the Japanese yen. A steep decline in polling numbers for the Brexit Exit side has helped GBPUSD end the week as the best performing currency, handily beating the Canadian dollar which has gained on rising oil prices.
It’s not alive, it’s not alive

Dr. Frankenstein famously shouted “It’s alive, it’s alive” in the 1931 movie Frankenstein. Various Fed speakers, from Janet Yellen on down, have parroted Mr. Frankenstein with reference to the April Federal Open Market Committee meeting. On March 16, Yellen said “.. I say again, every meeting is a live. April remains a live meeting”.

That statement may only be accurate in the sense that there is a meeting and FOMC members will attend in person. Yellen was pretty clear in her speech to the Economic Club of New York on March 29, that rates would only rise gradually. She would be hard pressed to defend a rate hike next week and even in June.

Such being the case, if Dr. Frankenstein was on the FOMC committee for the April meeting, he would be yelling “It’s not alive, it’s not alive”.

The BoJ is alive

The Bank of Japan may fill the “excitement” void left by the FOMC. Expectations for additional stimulus action by the BoJ rose considerably this morning with a Bloomberg story “BoJ officials are said to eye possible negative rate on loans”. That changes the negative interest rate dynamic. The immediate response was that USDJPY spiked to 110.70 from 109.30.

Since New York walked in, it has added to those gains and currently USDJPY sits at 111.30 (as of 1515 GMT). In addition, BoJ Governor, Haruhiko Kuroda, has been in the press a couple of times in recent days, making veiled threats of intervention.

USDJPY may stay bid ahead of Thursday’s meeting while reacting (in either direction) to additional “leaks”. Nevertheless, the BoJ may need to borrow European Central Bank chief Mario Draghi’s bazooka (and hope it works better for them than it did him) to break the downtrend that has existed since February when support in the 116.20-30 area gave way.

I’m loving it

Meanwhile, back in Canada, what better way to describe the FX market attitude to the Loonie than by borrowing McDonald’s slogan, “I’m loving it”, although that would change quickly if it really was a loon in between the buns. But I digress.

Today’s Canadian Retail Sales and CPI data capped a month of mostly better than expected domestic data that turbo-charged the Canadian dollar which was already soaring on the recovery in oil prices. It helps that the US dollar has been mostly on the defensive this week and that the other commodity bloc currencies have gained.

And speaking of using corporate slogans, the Bank of Canada appears to have co-opted the Google (now Alphabet) mantra of “Do no harm”. Governor Stephen Poloz was at his ambiguous best during last week’s press conference and didn’t say anything to hurt (or help) the currency.

At the same time, the Canadian data is merely a sideshow to global developments. The Loonie is still vulnerable to the ebbs and flows of oil prices and overall sentiment. Russia and Saudi Arabia are threatening to boost oil production on the back of the Doha meeting failure. Goldman Sachs analysts believe that the current bullish rally in oil is unsustainable as the fundamentals do not support the current price level. Remember, prices jumped because recent US crude inventory increases were less than expected, not because inventories declined. A drop in WTI prices would quickly curtail USDCAD losses.

US dollar sentiment is the other major driver. At the moment, FX markets are of the mind that the Fed is on hold until December 2016 and even then the CME FedWatch only assigns a 69% probability of a move. Anything that occurs that suggests the Fed will move sooner rather than later will give the US dollar a big boost and have a nasty impact on the Canadian dollar.

The week ahead

It’s show time! Three central bank meetings are on the docket, the FOMC, BoJ and the RBNZ. The BoJ may announce additional stimulus, the RBNZ could cut rates and the FOMC statement could sound hawkish.

Unfortunately, all that action starts in the New York afternoon on Wednesday.
The previous two days may be rather boring, especially Monday with Australia and New Zealand closed for Anzac day.

The end of the week should be as lively as the beginning of the week is dull. There is a lot of major data from various centres and the usual month-end rebalancing flows to provide the icing on the cake.

The week ahead

The Opec meeting in Doha should have kicked off an extremely volatile week of FX trading. It did, but only if the week was just Monday.

Monday opened with oil tanking, Nokkie and the Loon gapping lower and Japan tremoring from a couple of earthquakes. USDJPY dived to 107.81 and the Nikkei shed 3.4%. But that was Asia. It was a different FX world when Europe opened. European traders bought oil and prices rose rapidly supported by news of an oil workers’ strike in Kuwait that cut daily production by over 50%. USDJPY rebounded to above 108.80. When New York finished their session WTI was over $40.00/b and traders were in a risk on mode.

The risk on mode continued on Tuesday in Asia helping to drive equities into the green throughout the region. The Bank of Japan’s Kuroda was making veiled intervention threats, in a Wall Street Journal interview. AUDUSD traders dismissed the Reserve Bank of Australia minutes and pushed the currency to a 10 month high at 0.7803. European and New York traders followed Asia’s lead, selling US dollar across the board. EURUSD was making the first of three attempts in the week to break above 1.1400-they all failed.

Wednesday, the slide in oil prices which began on Tuesday worsened on news that the Kuwait strike had ended. Things were looking grim until the US Energy Information Administration reported a smaller build in weekly crude inventories. Add fresh rumours of another oil meeting, this time in Russia, and suddenly everyone wanted oil. WTI rose 4% by the close in New York. The looming European Central Bank (ECB)meeting the next day led to a bout of profit taking in FX and by the New York close, the US dollar was up across the board.

Thursday was very quiet in Asia and in the European morning. That all changed when the ECB meeting ended. There was a flurry of action. EURUSD spiked higher but quickly retraced all those gains and ended the day where it started. Draghi was dovish but not aggressively so, which left traders no better informed than they were before the press conference. WTI prices slipped from the highs which for lack of a better reason, gave USDCAD traders and excuse to buy. The day finished with the sad news of the end of the reign of the purple prince.

Friday, the BoJ put the cat among the pigeons with a leak of possible interest rate cuts at next Thursday’s meeting. USDJPY soared.